Federal Reserve Chairman Jerome Powell has a clear message for Congress: Spend more money, right now.
In an interview Wednesday with the Peterson Institute for International Economics, Powell called the COVID-19 pandemic an unprecedented economic challenge that needs to be met with even more aggressive federal policies.
“There is a sense, a growing sense, I think, that the recovery may come more slowly than we would like, but it will come,” Powell said. “And that may mean that it’s necessary for us to do more.”
The central bank has created a host of new lending facilities to provide credit to financial institutions and large corporations during the sudden economic shock, and it expanded its balance sheet to $6.6 trillion to do so. But Powell warned that Fed loans alone won’t prevent a prolonged recession.
“The recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems,” Powell said. “Additional fiscal support could be costly, but worth it if it helps avoid long term damage and leaves us with a stronger recovery.”
Powell then pointed to Congress. “This trade-off is one for our elected representatives who wield powers of taxation and spending,” he said.
More than 33 million people have filed unemployment claims in the seven weeks since officials began taking steps to stop the spread of COVID-19 and the April unemployment rate soared to 14.7 percent, a figure that is expected to jump again in May.
Congress has enacted four laws responding to the pandemic that total nearly $3 trillion in new financial aid to out-of-work individuals, households, businesses, health care providers, and state and local governments. House Democrats proposed spending another $3 trillion in a bill unveiled Tuesday.
But Republicans have argued against immediately passing additional fiscal measures, saying they’d rather see how the economy responds to the money already provided. They’ve also raised concerns about federal debt, which is on course to surpass 100 percent of gross domestic product this year, the highest level since World War II.
"I don’t think at this point there’s any sense of urgency, until we see how some of these programs that are already authorized and funded are working, and it seems like at least right now they’re working pretty well,” Senate Majority Whip John Thune, R-S.D., said Tuesday.
Powell addressed those arguments in his interview. “I think, now, when we are facing the biggest shock the economy has had in modern times, is for me not the time to prioritize considerations of debt,” he said.
“I think the time to do that is during good times, when the economy is strong and unemployment is low, that’s the time to be addressing those concerns,” he added.
Debt worries misplaced
Economists from across the political spectrum largely agree with Powell.
Republicans like former Congressional Budget Office Director Douglas Holtz-Eakin have urged Congress to spend more now and worry about the national debt later. Writing in the National Review, George Mason University economist David Beckworth said that deflation from the massive economic shutdowns, not inflation from fiscal and monetary responses, was the economy’s biggest risk.
Powell, who in the past has consistently warned Congress about the dangers of unchecked national debt, also suggested that the best method of reducing the debt was through spurring economic growth, not austerity. “We will eventually have to return to a sustainable fiscal path, and that just means that you’ve got to get the economy growing faster than the debt,” he said.
Fed chairmen don’t normally give unprepared remarks, and even more rarely tell Congress what to do. But these aren’t normal times. Powell took the unprecedented move of appearing on network TV in March, and has repeatedly called for more federal spending to support the economy since.
“The speech seemed intended to encourage more fiscal action and to warn that waiting to provide support could carry the cost of turning illiquidity into insolvency and destroying the productive capacity of the economy,” said Sam Bell, policy director at Employ America. “This was a dual message: Don’t wait and go bigger.”
The coronavirus recession has hit lower-income Americans the hardest. Powell said almost 40 percent of households earning less than $40,000 annually as of February lost jobs in March. He noted that the central bank’s ability to help them is limited — the Fed can lend money to financial institutions and larger corporations, but it cannot spend money.
“The loss of thousands of small- and medium-sized businesses across the country would destroy the life’s work and family legacy of many businesses and community leaders and limit the strength of the recovery when it comes,” Powell said. “These businesses are principal sources of job creation, something we will need sorely as people seek to return to work.”
Critics on the left have said the Fed could do more, however, by requiring companies that use its lending facilities to retain workers or adopt other pro-employee policies. While a roughly $2 trillion economic package passed in March suggested the Fed set up a lending program with some of those restrictions, it didn’t require it, and the Fed hasn’t placed them on its facilities for large bond-issuing corporations or midsize companies.
In some cases, the Fed has been able to bring liquidity to markets by announcing that it would open a lending facility for those markets, Powell said. He didn’t name any, but the Money Market and Primary Dealer lending facilities were only briefly used in March and April.
“It may mean that we actually aren’t needed,” he said.
But he added a proviso that he believed the Main Street Lending Program, a $600 billion facility backed by $75 billion in equity supplied by the largest March aid package, will be needed. Companies using the program will be those with less than $5 billion in revenue, fewer than 15,000 employees and “probably those that don’t have access to the syndicated loan markets.”
Powell said he expects the Fed’s Main Street lending program “to go live in a few weeks.” He pointed out that under its emergency powers, the Fed has wide latitude in making loans. All that is required for the Fed to make loans is that the borrower be solvent, he noted.
“We’ll be a big help to companies for a while, but over the longer period of time it may be that more fiscal help is needed,” Powell said.